[Congressional Record Volume 143, Number 63 (Wednesday, May 14, 1997)]
[Extensions of Remarks]
[Pages E919-E920]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


         THE INTRODUCTION OF ``THE ESOP PROMOTION ACT OF 1997''

                                 ______
                                 

                          HON. CASS BALLENGER

                           of north carolina

                    in the house of representatives

                        Wednesday, May 14, 1997

  Mr. BALLENGER. Mr. Speaker, I come before the House today to 
introduce legislation to promote more employee ownership in America. I 
believe this is a modest proposal which can be deemed technical and 
clarifying in many respects. Entitled ``The ESOP Promotion Act of 
1997,'' this bill is virtually the same, except for one new provision, 
as legislation I introduced in the 102d, 103d and 104th Congresses with 
bipartisan support. Nearly 100 sitting members of this House have 
cosponsored this legislation over the years and, if former members are 
included, the number is over 200.
  Mr. Speaker, let me make the point that the last Congress repealed a 
modest tax law incentive that aided the creation of Employee ownership 
through Employee Stock Ownership Plans [ESOP's]. Since this provision 
affected the creation of about 25 to 40 new ESOP's a year, I believe it 
was a step backward by the last Congress. This action was taken in the 
Small Business Job Protection Act of 1996, Public Law 104-188, or the 
minimum wage bill, a legislative battle in which I was very involved.
  So, I now encourage my colleagues in the 105th Congress to stand up 
for employee ownership and to create a positive record for one of the 
most positive economic trends in America today--ownership by employees 
of stock in the companies where they work through an ESOP. Allow me to 
explain each section of my bill:
  Section 1: Names the bill ``The ESOP Promotion Act of 1997.''
  Section 2: Corrects and clarifies the provision in last year's Small 
Business Job Protection Act that permits a subchapter S corporation to 
sponsor an ESOP. Last year's provision was added by Senator John Breaux 
in the Senate Finance Committee, and has been part of my ESOP bills 
since 1990. The effort to have these small businesses offer employee 
ownership to their employees started in 1987. Many private sector 
groups, representing both professionals and businesses, support 
permitting subchapter S corporations to sponsor ESOP's.
  Unfortunately, the provision adopted last year was not perfected and 
literally is not workable. In addition, it does not permit the 
subchapter S corporation to sponsor an ESOP under the same ESOP 
promotion rules the C corporations do.
  Section 2 extends the ESOP rules to subS ESOP's, and makes the 
technical changes necessary to have ESOP's operation in the context of 
a subchapter S company.
  Section 3: From 1984 until 1989 there was a provision of the tax 
code, former Internal Revenue Code section 2210, that cost the Federal 
Treasury no more than $5 million per year, that was an effective way to 
create more employee ownership. The former law permitted certain small 
estates that had closely held stock owned by the descendent at time of 
death to transfer that stock, or some of it, to an ESOP of the closely 
held company, and the company would pay the estate tax on the value of 
the stock. No estate tax is being avoided here; it is just shifted from 
the estate to an American, closely held corporation that has employee 
ownership through an ESOP.

  Section 4: This section actually is a simplification of how the 
current law provision permitting deductions on dividends paid on ESOP 
stock operates. Under current law, an ESOP sponsor may deduct the value 
of dividends paid on ESOP stock if the dividends are passed through to 
the employees in cash, or if the dividends are used to pay the loan 
used to acquire the stock for the ESOP, and if the employees get more 
stock equal in value to the dividends.
  My proposal would permit the deduction if the employee in the ESOP 
has the option to get the dividends in cash, or if he or she directs 
that the dividends are reinvested in more stock of the company.
  Why is this simplication? Because, under a very complex chain of 
events, that the IRS has approved in a series of letter rulings, the 
employee can have ``constructive receipt'' of the cash dividend, and 
then ``constructively'' take the dividend money back to the payroll 
office and reinvest it. Since the employee has received the dividend in 
cash, the deduction is allowed, although in reality it was reinvested.
  My proposal says cut the chase. Where the employee has made clear a 
desire for the dividends to be reinvested, why have an expensive, 
confusing system that the IRS has to review after the ESOP sponsor 
spends dollars on designing the scheme? There is no reason.
  Section 5: This section would correct what I feel is an anomaly in 
the current law. Under current law, Internal Revenue Code section 1042 
permits certain sellers to an ESOP to defer the capital gains tax on 
the proceeds of the sale if he or she reinvests the proceeds in the 
securities of an operating U.S. corporation, and the ESOP holds at 
least 30 percent of the corporation at the conclusion of the 
transaction.
  This provision plays a major role in the creation of over 50 percent 
of the ESOP companies in America. Currently it benefits owner-founders, 
and outside investors of closely held companies, but is not available 
for employees who own stock in the company due to their working for the 
company.
  The anomaly arises due to some IRS letter rulings in the mid-1980's, 
and an out of date provision in section 1042 from 1984. The current law 
states that if an employee has stock because of exercising a stock 
option grant from the employer, that stock is not eligible for a 1042 
treatment. The IRS has expanded this provision to prohibit all stock, 
even if bought for full market value by the employee to be ineligible 
for 1042.
  My bill erases this prohibition; and for stock that was obtained with 
an exercise of a tax qualified stock option, if sold to the ESOP, the 
corporation is not permitted a tax deduction for the value of the 
option. This makes the provision fair, and prevents a double tax 
advantage--either the employee takes the 1042 treatment, or the 
corporation takes a deduction, not both.
  This provision also corrects another technical anomaly in current 
law. As presently written, Code section 1042 provides that any holder 
of 25 percent of any class of stock in a company cannot participate in 
the ESOP with 1042 stock. My bill would change the measure so that the 
25 percent would be measured by the voting power of the stock, or the 
value of the stock in terms of total corporate value. This kind of 
measure is used in other sections of the Code.
  Section 6: My final section is another modest estate tax provision, 
that in prior years the Joint Committee on Taxation has estimated would 
cost the Treasury less than $1 million per year. This provision would 
help create employee ownership in those limited situations where an 
owner of a closely held business wants to ensure his or her spouse has 
income from the business during their remaining years, and then after 
his or her death the stock passes to the ESOP, as if it were eligible 
as a charity. With plenty of restrictions to ensure that there are no 
family beneficiaries of the ESOP created with the stock, this does not 
affect revenue because the decedent can create one of these trusts, 
called a charitable remainder trust for his or her spouse, and have its 
corpus go to charity in any event.
  Mr. Speaker this explains my bill. This bill, except for the two 
estate tax provisions, was introduced by Senator John Breaux and 
Senator Orrin Hatch on April 30 this year as S. 673.
  I urge those of my colleagues who want to encourage employee 
ownership in America to join me, and to work hard to include these 
provisions in the tax bill that will soon be considered by the House 
Ways and Means Committee.

[[Page E920]]



                          PERSONAL EXPLANATION

                                 ______
                                 

                          HON. XAVIER BECERRA

                             of california

                    in the house of representatives

                        Wednesday, May 14, 1997

  Mr. BECERRA. Mr. Speaker, on May 1, 1997, I was unavoidably detained 
during rollcall vote No. 98, the vote on agreeing to House Resolution 
129, providing amounts for the expenses of certain committees of the 
House of Representatives in the 105th Congress.
  Had I been present for the vote, I would have voted ``no.''

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